There is restricted entry of foreign banks to the banking industry and these restrictions are meant for the better of the host countries. Foreign banks have greatly raised their presence in the emerging market countries during last years (Detragiache et. al., 2004). I would not recommend the removal of the restrictions to entry and activity due to several underlying reasons. The activities of foreign banks are out to be restricted so that the country does not lose track of its monetary policies and fiscal policies. Despite the severe restrictions, foreign banks had an immediate impact (Lukauskas, 1997).
Inflation is a problem that many countries face and giving examples of less developed countries, they are vulnerable to exploitation from multinational organizations that include banks. Inflation is an important factor in banking and a country's central bank will often attempt to control it (Reif et. al., 1997). In their effort to attract the Foreign Direct Investment, they find themselves losing their national sovereignty by allowing the multinational companies to call the shots. In order to be able to effectively control the money flow in the economy, the activities of foreign banks should be keenly watched and appropriate action should be taken. Given that they have a large float and cannot fall trap to the monetary policies of the government like the bank rate, they are uncontrollable when things fall apart. These banks do not in most cases borrow from the central banks of the host countries when they fall short of cash, but would rather get money from their home countries, something that has very unstable effects on the domestic currency. Some countries limit foreign bank entry, usually to protect the nationalbanking sector, for reasons related to the national sovereignty (Heffernan, 2005).
The original reason that governments put forward their restrictions to foreign banking is in an effort to protect the domestic banks. The banks of the host country’s are at risk if not protected. They will be subjected to unfair competition that will, given some small period of time, get them out of the market. Foreign banks also demonstrated their competitiveness (Lukauskas, 1997). Initially, the customers will benefit because the banks will want to attract customers, but in the long run when all domestic banks are no longer strong to give good competition, the customers will be subjected to harsh conditions due to the fact that they will be vulnerable to the situation.
The emergence of the market authorities is a positive step in order to protect domestic companies. In some foreign markets, US firms trade the regulatory barriers (Reif et. al., 1997). This market cannot be a free market operating on its own and that it is for the larger interest of the country and when the market players engage in some unethical activities, the market and the country are all bound to destabilize. Therefore, it is the duty of the authorities to monitor the activities of the foreign banks and suspend any banks that are proved to be engaged in unscrupulous banking activities, not health for the domestic economy. It also clears up the confusion as to whether laundering money through a foreign bankis an offence (Hopton, 2009). Some foreign banks may be used as a destination for money to be cleaned and this is done in the country.
Another problem with the foreign banks is that they prefer providing services to individuals in the urban areas. The population that is in need of the banking procedure is largely in the rural areas and therefore they target where domestic banks are trying to thrive. The ability of the bankto be successful in the host country depended upon local knowledge and contacts (Caprio et. al., 2006).
It is important for the restrictions to be available in that they aid in controlling and maintaining the domestic share of ownership in the company. It is important for any country to have its citizens owning a substantial amount of the company share and also hold important positions in the company. This helps make sure that the interests of the citizens of the particular country are also taken care of. Restrictions on foreign ownership have been the slowest to ease in the financial sector itself (Shilling et. al., 1996).
Thought it is important have a substantial amount of foreign direct investment in a country, it is also of great importance to make sure that the coming of the external investment does not lower the social welfare and has no negative effects to the whole banking system and more so, the domestic banks. Finally, foreign bank entry may stimulate the economic development in emerging markets (Heffernan, 2005).